Vodafone tops list of M-Pesa revolution beneficiaries
File I NATION Safaricom chief executive Robert Collymore. Britain’s Vodafone has earned Sh1.6 billion or seven per cent of money transfer revenues from Safaricom’s mobile money transfer service, M-Pesa, in the past four years, making it the biggest beneficiary of the telecoms giant’s fastest growing business line.
Britain’s Vodafone has earned Sh1.6 billion or seven per cent of money transfer revenues from Safaricom’s mobile money transfer service, M-Pesa, in the past four years, making it the biggest beneficiary of the telecoms giant’s fastest growing business line.
The money was paid in the form of royalties or licence fees to the UK-based telecommunications company, which holds proprietary rights over the revolutionary money transfer platform through Vodafone Sales and Services Limited (VSSL), an affiliate of Vodafone.
In the last financial year that ended in March, Safaricom paid VSSL (previously Vodafone Group Services) licence fees worth Sh1.4 billion – a massive rise from the Sh189 million paid in 2009.
The money is half of the Sh3.2 billion that Vodafone earned in dividends from its 40 per cent shareholding in the firm and more than the net earnings that Safaricom generated from the money transfer service.
M-Pesa earned Sh11.78 billion in commissions, having transferred Sh76 billion last year .
The revenue has steadily grown from Sh370 million in 2008.
Vodafone earns the royalties on the basis of a contract it signed with Safaricom prior to the March 2007 launch of M-Pesa in Kenya.
Failure by Safaricom to pay VSSL for the licence would, for instance, be in breach of the contract and attract a Sh2 billion penalty, according to the agreement whose contents were made public in the IPO document that Safaricom released in the run up to its listing at the Nairobi Stock Exchange in 2008.
“If a party is found to be liable to the other for breach of its obligations under the agreement, such party shall be liable to pay up to 15 million euros (currently exchanging at about Sh134),” the IPO document stated.
By the end of March this year, the cumulative worth of M-Pesa transactions stood at Sh828 billion, which is an average of Sh17 billion a month.
Stock market analysts say that the continued strength of the Safaricom share is hinged not so much on the company’s voice business – where tariffs dropped drastically in the past year – but on M-Pesa.
The money transfer service and revenues from other data services that grew at the rate of 57.1 per cent last year to Sh24.7 billion continue to make Safaricom a strong growth stock at the bourse. Its PE currently stands at 10 per cent.
Its share at the Nairobi Stock Exchange has lost 42 per cent to settle at Sh3.35, which is below the psychological IPO price of Sh5. M-Pesa has 14 million clients and has been registering new users at the rate of about 200,000 a month.
VSSL earns the revenue under an agreement with Safaricom that recognises VSSL as the owner of the M-Pesa service, which the Kenyan telecoms firm only uses under a licence.
“The Vodafone Sales and Services Limited (VSSL), which owns the M-Pesa solution, has entered into a Managed Services Agreement with the company under which VSSL agrees to provide the M-Pesa solution to the company against which a licence fee is due quarterly,” said Safaricom’s annual report for 2011 set to be discussed in a annual general meeting scheduled for next month.
“The licence fee is based on the number of active subscribers multiplied by a service fee rate, which is graduated depending on the number of subscribers (the service fee rate reduces with increase in number of active subscribers),” says the agreement.
The fee is payable quarterly and is capped at 25 per cent of the revenue for every quarter with a floor of 10 per cent of revenue.
Since 2008 when the IPO was concluded, Vodafone’s share of the M-Pesa revenues has been adjusted downwards from a high of 32.5 per cent in the first year of operation. Until September 27, 2009, the company that owns the world’s most successful money transfer product, was known as Vodafone Group Services Limited, having been incorporated on March 11, 2009.
Under the agreement with VSSL, Safaricom is charged with the role of marketing the M-Pesa service to prospective customers, agents and merchants and to pay Vodafone the fee for the provision of the managed services and licence to operate the service in Kenya.
The agreement that was signed on February 23, 2007 under the laws of England and Wales was to remain in force for an initial term of five years subject to review after six months of commencement.
It appears that parties to the agreement had foreseen the potential of M-Pesa even before it went live in 2007 when it registered 52,000 users in its first month.
Analysts see M-Pesa increasingly becoming a key revenue source for Safaricom .
Sterling Investment Bank says in a recent report to its clients that the M-Pesa innovation in relation to money transfer and partnerships with various institutions is likely to ensure steady revenue growth going forward.
“M-Pesa invention remains a key achievement by Safaricom and is expected to continue boosting its revenues significantly.
Its modification and upgrades to enable mobile banking and settlement of payments continues to be a major boost to the company,” said the analysts.
Renaissance Capital, another investment bank, says that with M-Pesa growing revenues, the product “has attractive growth prospects down the road, given that it is becoming more of a payments system.”
